Updated January 7, 2023
Termination of employment in Ontario can occur in two different ways: (i) termination without cause; or (ii) termination for cause. An employee who has been terminated without cause is presumed to be entitled to reasonable notice of dismissal or pay in lieu of notice of dismissal (a.k.a. a severance package). In contrast, an employee who has been terminated for cause because of a serious act of misconduct is not entitled to notice of dismissal or a severance package.
An employer has the right to terminate an employee’s employment without cause at any time and for any legal reason. All the employer has to do is provide the employee with reasonable notice of dismissal or pay in lieu of notice of dismissal. For example, an employer could terminate the employment of an employee even if the employee is a good employee who has not done anything wrong. The employer has the right to terminate the employment of its top salesperson. The decision may be a bad business decision (why dismiss your top salesperson?) but the employer has the right to do it as long as the salesperson is provided with working notice of his or her dismissal or a severance package.
An employee who is entitled to reasonable notice of dismissal is required to take reasonable steps to mitigate the financial loss they suffered as a result of the lose of their employment by taking reasonable steps to find new employment. A Court will deduct from a wrongful dismissal award the money the dismissed employee earned at alternate employment during the reasonable notice period.
It is extremely common for employers to ask a potential employee to sign an employment contract that contains a termination clause that will limit the employee’s entitlements upon dismissal. Employers do this so that they can minimize the amount of severance pay they will owe to dismissed employees. If an employee’s employment contract contains an enforceable termination clause, the termination clause will rebut the presumption that the employee is entitled to reasonable notice of dismissal and the employee will only be entitled to the notice or payments specified by the termination clause.
In 2020 the Ontario Court of Appeal released Waksdale v. Swegon North America. This groundbreaking decision impacted virtually every employment contract in Ontario because the vast majority of employment contracts contained a provision that stated that the employee’s employment could be terminated without notice “for cause” or “for just cause”. All of these termination clauses were now void, even if the employee was not terminated from his or her employment for cause.
The Court in Waksdale stated that a termination clause in an employment contract that allows for an employer to terminate an employee without notice for “cause” or “just cause” is void. As a result, the employee is entitled to reasonable notice of dismissal at common law. This was confirmed in by the Ontario Court of Appeal in the 2022 decision Rahman v. Cannon Design Architecture Inc. where the Court wrote at paragraph 30:
This court has repeatedly held that if a termination provision in an employment contract violates the ESA – such as a “no notice if just cause” provision – all the termination provisions in the contract are invalid.
The legal principle that a termination provision that has the potential to breach the minimum standards legislation in a province (the ESA in Ontario) applies to other Canadian provinces. Significantly, however, the minimum standards legislation is most other provinces allows an employer to terminate an employee for “cause” or “just cause”. In Ontario, an employee can only be terminated without notice if the employee is “guilty of wilful misconduct.” As noted by the Court in Rahman, wilful misconduct is a higher standard than cause at common law.
The Entitlement to Reasonable Notice of Dismissal
An employee who has been dismissed and given a severance package that is less than his or her lawful entitlement has been wrongfully dismissed. If the employee’s employment contract does not contain an enforceable termination clause, the employee is entitled to reasonable notice of dismissal.
Calculating an employee’s entitlement to reasonable notice of dismissal will vary with circumstances of any particular case. It is rare for a dismissed employee to receive less than three months’ notice or greater than twenty-four months’ notice.
The most frequent factors considered by a court when determining the dismissed employee’s entitlement to reasonable notice include the employee’s: age; length of service; the character of employment; and availability of similar employment. A court will weigh and balance all of these factors and may consider other factors relevant to the specific facts of the case. It is important to understand that determining an employee’s entitlement to reasonable notice is not a mathematical formula – it has been called more of an art than a science. As noted by the Court of Appeal in Lin v. Ontario Teachers’ Pension Plan at para. 54: “at its foundation, reasonable notice is the period of time it should reasonably take the terminated employee to find comparable employment.”
For this reason, it is an error of law to apply a rule of thumb whereby the employee is provided with a severance package calculated on the basis of one months’ notice for every year of service. It is an error because the approach only considers the employee’s length of service and not the other relevant factors such as the employee’s age and availability of similar employment.
Typically, an employee who is dismissed without cause does not receive advanced warning of the termination of employment. Instead, the employee is notified in a termination meeting that his or her employment is being terminated effective immediately. The employer provides the dismissed employee with a termination letter that provides an offer of a severance package. The purpose of the severance package is to compensate the employee for the employer’s failure to provide the employee with proper notice of dismissal. The majority of terminations of employment in Ontario are without cause. The employer does not need a good reason to end the employment relationship and, therefore, is not required to prove that the employee did something wrong in order to justify its decision to dismiss the employee. Instead, the employer simply exercises its right to end the employment relationship by providing the employee with reasonable notice of dismissal.
An employer who terminates an employee without cause is required to ‘make the employee whole‘ during the period of reasonable notice. In other words, at common law, the employee is entitled to continue to receive all the compensation (including commissions, bonuses and stock options) and benefits that he or she would have enjoyed if still actively employed with the employer throughout the notice period.
In order to limit employees’ common law rights, it is common for employers to have bonus, commission or stock option plans that state that an employee must be “actively employed” by the employer in order to be entitled to be paid variable pay. However, this type of language is not typically not sufficient to prevent an employee from successfully claiming a pro-rata bonus and commission during the reasonable notice period. The language in the plan must make it clear that the employee will not receive the variable pay even if the employee’s dismissal is without notice and therefore a breach of contract. Anyone dealing with a dispute over commissions, bonuses or stock options should consult a lawyer with specific expertise in this particular area of law. It is highly technical.1see Paquette v. TeraGo Networks Inc., 2016 ONCA 618 and Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619 and Andros v. Colliers Macaulay Nicolls Inc., 2019 ONCA 679 at para. 55;
The employer also has the option of providing the employee with working notice of dismissal or a combination of working notice and pay in lieu of notice. There is no difference at law between working notice and payment in lieu of working notice.2see Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC) at paras. 20-22; In Ontario the regulations of the Employment Standards Act 20003Employment Standards Act, 2000, SO 2000, c 41 (“ESA”) require that an employer provide fresh notice of dismissal if the termination date is subsequently extended by more than 13 weeks because the employer has assigned the employee with temporary work.
A fixed-term employment contract will also rebut the presumption of reasonable notice of dismissal. The Ontario Court of Appeal held in Howard v Benson Group Inc.4Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256; that an employee who has been dismissed prior to the end of the fixed term will be entitled to the wages and benefits he or she would have received to the end of the fixed term unless the employment contract contains an enforceable termination clause that specifies a pre-determined notice period in the event of early termination.
It is not unusual for a severance package offered by an employer to be less than the employee’s legal entitlements. If this is the case the former employee has the right to commence a wrongful dismissal action and ask the court to order the employer to pay damages for failing to provide proper notice. Dismissed employees should have their severance package reviewed by a lawyer whose legal practice is focused on employment law to ensure that the severance package offered is fair.
In the vast majority of wrongful dismissal cases, the employer and former employee reach a voluntary settlement of their dispute prior to the case being decided by a court. However, litigation or the threat of litigation is usually the only leverage that an employer has to negotiate a better severance package.
If you have been terminated from their employment and are unsure how to respond to the dismissal you will find the sub-chapter titled “Termination of Employment: How to Respond” useful reading.
If you want legal advice that is specific for your case, book a consultation today.
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|↑1||see Paquette v. TeraGo Networks Inc., 2016 ONCA 618 and Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619 and Andros v. Colliers Macaulay Nicolls Inc., 2019 ONCA 679 at para. 55;|
|↑2||see Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC) at paras. 20-22;|
|↑3||Employment Standards Act, 2000, SO 2000, c 41|
|↑4||Howard v. Benson Group Inc. (The Benson Group Inc.), 2016 ONCA 256;|